Saturday, October 13, 2007

Emerging Markets Rock, Dominate US Returns

Five years after the American stock market hit bottom after the bursting of the technology stock bubble and the 2001 recession, share prices as measured by the S&P 500 have doubled (see top chart above).

That growth amounts to a compound annual increase of 15% a year and is the fastest doubling off a market bottom since the 1980s. But in the current world environment, it does not look impressive. Nearly every other stock market in the world has done better.

Of the 83 countries for which records of a major stock index were available, the American share price increase in the five years after Oct. 9, 2002, was better than those of only four. All four are small countries, either in the Caribbean or Latin America.That all 83 markets around the world had an increase is emblematic of the strength of the global economy and the willingness of international investors to pour money into markets that many had never heard of — or that did not exist — 20 years ago.

The figures show the change in dollars, which makes returns in many countries appear more impressive than they would if local currencies were used because the dollar has generally been weak. Markets in Britain and Italy, for example, doubled in terms of dollars, but not in pounds or euros.

MP: Bottom chart above (click to enlarge) shows 5-year stock market returns from MSCI-Barra, measured in USD. Of the 50 international stock market indexes available through MSCI, 5-year returns in the U.S. market rank last. Individual investors can easily invest globally now through mutual funds to take advantage of the world stock market boom. For example, you can invest in the Vanguard Emerging Markets Stock Index Fund with a minimum of $3,000, and the fund has had a 44% return YTD and 64.35% over the last year.

5 Comments:

Step outside the bubble: the US dollar has crashed 50% over the last five years, so yeah, anything that isn't pegged to the dollar has doubled. Wait until China drops their loose-dollar peg: you'll see US stocks double again in a matter of months.

The tread-weighted broad dollar index includes several major currencies which trade pegged or banded against the USD (China, Saudi Arabia, HK). CAD has jumped 50%+ over the last 5.5 years against the USD, as has the Euro. In any case, citing incredible growth in nominal terms without referencing the weakness of the underlying currency might just be enough to win you a spot on 'Zimbabwe Tonight'.

2. The Euro has appreciated by 41.85% over the last 5 years, and the Canadian dollar by 35%, using the monthly currency values at the St. Louis Fed for 9/2002 and 9/2007. Using daily rates through mid-October would show some additional appreciation.